“Consolidation of the traditional private client brokers into the major wealth management chains has triggered significant change for the closed-end fund sector,” Miton Global Opportunities fund manger Nick Greenwood said in the annual report for the investment trust of investment trusts.
“Demand from this traditional source has rapidly declined,” Greenwood said.
“Given that the share prices of closed-end funds are decided by the balance of supply and demand, many perfectly competent trusts can be acquired at deep discounts.”
His largest holdings are the £117.1m (€132m, $154m) India Capital Growth Fund, £316.3m Macau Property Opportunities Fund and £480.4m Phoenix Spree Deutschland.
Behemoths
Super groups like Brewin Dolphin, Rathbones and Investec have created an issue for investment trusts having been one of the key supporters of the industry over a number of years, says Winterflood Investment Trusts head of research Simon Elliott.
“Suddenly investment trusts aren’t liquid enough and aren’t large enough for them to back,” Elliott says.
“What you’re seeing is they’re happier to own some of the larger names. Everyone seems to own Scottish Mortgage trust at the moment for instance, not least because it’s performed very well.”
Scottish Mortgage assets currently sit at £7.6bn, according to the Association of Investment Companies (AIC).
Historically, £100m was the floor at which wealth managers wouldn’t invest in an investment trust, but that has risen, he says.
“Anecdotally, people are now talking about £500m. If you look across the registers of any number of investment trusts in that £100m to £500m range you’re still seeing all the leading wealth management groups, so it would be wrong to say they’re actively leaving the sector. It’s just that they’re far more conscious than they once were over size and liquidity.”
Look beyond liquidity
In fact, by historic standards the average investment company discount is relatively narrow at 3.3%, according to Morningstar data.
“The wealth management firms are consolidating and this has meant some larger firms will only invest in larger investment companies,” says AIC communications director Annabel Brodie-Smith.
Source: Morningstar/AIC
The largest quartile of the investment company industry trade over £1m of shares a day, Brodie-Smith says.
She says: “Liquidity may be an issue for larger wealth management firms who construct off-the-shelf portfolios for their clients.”
“However, the exclusion of all investment companies on the grounds of liquidity is not in the best interests of their clients who will lose out on some of the best performing investments over the long-term.”
DFM allocations
Brewin Dolphin, Rathbones and Quilter Investors all told Portfolio Adviser they have no hard and fast rules when it comes to the minimum assets they look for in an investment trust.
Quilter’s multi-asset Cirilium range will own smaller investment trusts and will consider supporting them at launch, according to portfolio manager Rasmus Soegaard, a specialist in alternatives.
But Soegaard says: “Where we have exposure to smaller trusts we do have to think carefully about liquidity and, when investing in an company where we may be a significant shareholder, ensure the size of our shareholding is appropriate.”
Soegaard says they reserve their investment trust budget for esoteric and illiquid exposure the portfolios could not get any other way.
Cirilium added £2.6bn investment trust HICL Infrastructure to its Balanced and Conservative portfolios in May.
“We run pretty large portfolios and a decent exposure for us is around 20%. If I can find a way of doing it through an open-ended investment vehicle I would do that, unless the discount is tempting enough,” Soegaard said.
It has also added to consumer credit specialist Honeycomb, which has assets of £445.2m.
Rathbones head of research Elizabeth Savage says there could be opportunities for some investment companies with similar mandates to merge creating a more liquid secondary market.
Retail investors
Post the retail distribution review (RDR) the investment trust sector has seen a big pick up in retail investing via direct-to-consumer platforms like AJ Bell and Hargreaves, says Elliott.
“You just look at the way Hargreaves is creeping up the register of a whole range of investment trusts,” he says.
“If you’re a retail investor and you’re investing your Sipp money or your Isa money, liquidity is much less of an issue. You can be more flexible.”
Brewin Dolphin fund analyst Tom Jemmett agrees platforms have largely filled the void left by private client brokers.
Jemmett says: “When we analyse the investment trust market in aggregate we find the discount opportunity is in fact less compelling than other points in history.
“The interesting observation is this features across the market cap spectrum, so the investment case for those trusts with a market cap of £50m or less, arguably the losers in a world of smaller private client broker consolidation, is no more than for those larger more liquid investment trusts.”
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